Powell Says Fed Will Consider More-Aggressive Interest-Rate Increases to Reduce Inflation

The Fed raised its benchmark interest rate by one-quarter of a percentage point to a range between 0.25% and 0.5% last week, and officials penciled in a series of additional increases raising it to slightly below 2% at the end of this year and to around 2.75% next year.

Most Fed officials believe a neutral rate, assuming 2% inflation, is near 2.5%.

But Mr. Powell repeatedly stressed the uncertainty facing Fed officials as they navigate the aftereffects of a pandemic and the recent war in Ukraine, and he said officials are ready to shift their policy in a more disruptive direction.

“If we conclude that it is appropriate to move more aggressively by raising the federal-funds rate by more than [one-quarter of a percentage point] at a meeting or meetings, we will do so,” he said. “And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

Annual inflation rose to 6.1% in January, according to the Fed’s preferred gauge. Core inflation, which excludes food and energy, climbed to 5.2%. Most officials now see core inflation ending the year at 4.1%.

Mr. Powell said the inflation outlook “had deteriorated significantly even before Russia’s invasion of Ukraine,” and he warned that the effects of the war in Europe and the West’s response to heavily sanction Russia’s economy could further aggravate supply-chain disruptions while sending up prices of key commodities used to make a range of goods.

“There is no recent experience with significant market disruption across such a broad range of commodities,” said Mr. Powell. He highlighted the historical experience with oil-price shocks of the 1970s: “Not a happy one,” he added.

The Fed’s task now is to guide inflation down by raising rates to moderate demand but to avoid such an aggressive or rapid response that the economy slides into recession. Engineering such a so-called soft landing is still possible, said Mr. Powell, and he pointed to three instances over the past 60 years in which he thought the Fed had achieved such an outcome.

But he added several caveats: “No one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context,” Mr. Powell said.

Monetary policy is a “blunt instrument, not capable of surgical precision,” he added. “My colleagues and I will do our very best to succeed in this challenging task.”

The Fed is still counting on significant help from healing supply chains and a return of workers to the job market to bring inflation down this year and next. But Mr. Powell said, in contrast with the Fed’s stance through much of 2021, it could no longer set policy by forecasting such relief would materialize.

“As we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief,” he said.

Write to Nick Timiraos at [email protected]